AIB said it is offering to buy-back €2.6bn of the bank's subordinated, or higher risk, bonds at prices ranging from 25pc to 10pc of face value.

The offer has been launched even before a legal case brought by two hedge funds to block such action has a chance to go ahead.

The court hearing is due to go ahead on June 2 -- the bond buy-back is due to be launched on May 13 and will close later the same week.

The buy-back offer itself was not unexpected and if the deal is accepted by bondholders it will cut AIB's debts by around €2bn. Bondholders that reject the offer could face losses of up to 99pc if the deal goes ahead.

That's because every bondholder who agrees to sell back their bonds will also cast a vote in favour of stripping investors that reject the offer of their rights. Unlike normal corporate loan,s bond deals can be forced on reluctant sellers if a majority supports a deal.

The offer covers a number of separate bond deals of different seniority but no senior bonds are affected. The highest ranking bonds are being bought for 25c in the euro, with the lowest being offered 10c in the euro.

Finance Minister Michael Noonan said the offer gives bondholders a final opportunity for a "market based exit, at a return which is reasonable and fair". Traders said last night that the offer price was slightly below market expectations but the market dropped in response to the news.

Bonds valued at 25c in the euro by the AIB offer were trading at 29c before the offer was made. That was based on an expectation that some interest would be paid in addition to the cash offer price. The bonds traded down to the offer price as soon as details were announced, suggesting there will be little or no resistance to the offer.

Prices for Bank of Ireland's subordinated bonds also fell after the news. Investors there are worried that if that bank is taken into majority state ownership later in the year they face similar losses.

Bank of Ireland's 10pc bonds, due to be repaid in 2020, fell from 65c in the euro to as low as 58c yesterday.

The bank's largest institutional investor Harris Associates yesterday told the Bloomberg newswire that the bank had a "good chance" of using the debt for equity swap to avoid majority state control.

The bank has to raise €4.2bn in fresh capital by the summer, or take a further injection from the state. Some sources believe that the debt for equity move could raise upwards of €2bn. (Additional reporting, Bloomberg)